Easter Eurpe: The Economic Stakes Are High; G. Small

If Eastern Europe's march toward capitalism continues at anything near its current pace, the world's economy could undergo major, even dras tic, changes. The first effectsof the events within the Warsaw Pact already are being felt. Since the end of World War II, the economies of the United States and its NATO allies have been on a partial war footing, building armaments to protect Western Europe against a possible Soviet invasion. This sector of the U.S. economy is sure to contract in the wake of a more peaceful Europe. News stories already have appeared about Pentagon plans to cut back major programs, mothball naval vessels, and demobilize some military units. We can expect to see layoffs in the defense industry as well as bankruptcies among companies that depend upon defense contracts. Given the speed of current events, defense contractors are going to have little time to diversify into other areas, making the impact of expected budget cuts even greater.

Beyond the relatively obvious effect on the defense industry, we must analyze the possible impact of a capitalist Eastern Europe on the Mr. Small is a computer engineer in Manchester, New Hampshire. economies of the free world. If present trends con tinue, several powerful economies may suddenly be added to the world scene. Depending upon the results of the democratic movements in these countries, the impact on the world economy could range from trivial to dramatic. If the movement toward capitalism succeeds, the countries of Eastern Europe could be the eco nomic miracles of the next several decades, becoming the new Japan, Korea, and Taiwan of the early 21st century. In fact, they could build up their economies even faster. They have no devas tating war to recover from, and an educated and skilled labor force is already in place. The motiva tion to work for profit and a better life certainly seems to be present. The current standard of living is low by Western standards, with frequent short ages of even the most basic products. Given these conditions, we can expect that, at least for a while, a low-costpool of skilled labor willbe available to fuel new economic development. Unshackled from socialism, Eastern Europe could become a major consumer and producer of manufactured goods on the world market.

As conditions now stand, however, it is unlikely that Eastern Europe will become a major con sumer market, although many a Western Euro pean manufacturer already is looking east with a gleam in his eye. The economies of Eastern Europe are a mess, undoubtedly a major con tributing factor to the current political upheaval. While we may see a short buying spree,.particular 1y of personal consumer items, the supply of hard currency in these countries won't support a long term flow of goods across the border. Many of these countries already are heavily indebted to 186 THE FREEMAN • MAY 1990 Western banks, and the relative trickle of goods across the new open border between East and West Germany already is having a detrimental effecton the value of the East German mark on the blackmarket. Althoughthey may soonrun out of money,the people of Eastern Europe do have a healthy appetitefor Westerngoods.Theireconomiesare a shambles,but a trained, low-costwork force with a desire to improve its standard of living is an excellent starting point for a massiveeconomic expansion.Withouta true capitalistsociety,how ever,verylittlecan be accomplished.

AffirmingPrivateProperty The advancement of capitalism in Eastern Europe depends upon the recognitionof private property rights and contractual law by those in power.Investorsmustbe allowedto ownproperty, be able to have faith in the legal system,and be permittedto take profitsout ofthe country.Open ingup EasternEurope to freeenterprisewillbring in much-needed capital from foreign investors, providelessonsin businessand technologyto the localworkforce,andcreateopportunitiesforlocal start-upcompaniesthat will be needed to support the factoriesbuiltby foreigninvestors. Foreigninvolvementis needed for severalrea sons. First, foreign investors have the capitalist know-howto set up productivebusinesses.They haveaccessto,anddetailedknowledgeof,Western markets.And perhapsmost important,they have accessto the hardcurrencyandfinancialresources of the West. Restricting investmentto residents would result in a much slower and less efficient buildupofthe economy,withfar morefailuresdue to the trialand error natureof sucha buildup.

Once production and exports are increased, Eastern European economies will start to earn hard currencythat can be reinvestedin localbusi nessesso as to bolsterthe country'sabilityto pro duce for its own needs;or the moneycan be used to buyconsumergoods,raw materials,and capital goodsfrom abroad. WesternEurope, becauseof it culturalties and geographicproximity,willfeel the majoreffectsof any economicexpansionin the East. If, for exam ple, substantial new loans are made to Eastern Europe, it is likelythat a large flow of goods will begin to move from West to East, and profits of Westernmanufacturerswill climb.In order to pay off the loans,however,productiveenterpriseswill haveto be developedquicklyin the East.Thisperi odofdevelopmentwillprovideanotheropportuni ty for Westerncompaniesin the form of low-cost productionfacilitiescloseto majorWesternEuro pean markets.This, in tum, couldlowerthe price of European productsand make them more com petitivewithAsianproducts,in bothEuropeanand Americanmarkets.

The downside of this would be some loss of manufacturingjobs in WesternEurope. In addi tion, Eastern Europe might becomemore attrac tive for investmentthan Latin Americaor Africa. Thiscouldresultin a declinein new investmentin those areas. In the longerterm, however,Eastern Europe is likely to become integrated into the existing European economic system. When the standard of living and labor costs in Eastern Europe reach a par with the rest of Europe, the tide ofinvestmentwillturn outwardagain.A larg er pool of European industrialand businesscon cerns will once again be looking at Third World countriesfor new investmentopportunities. On the oppositeend of this spectrumof possi bilitiesis the visionof an Eastern Europe reduced to a charity case and dependent upon handouts from the industrializednations, much like many Third World nations that overdosed on socialist policies.The peopleof Eastern Europe havelived under a Big Brother socialist system for a long time,andmaynot be willingto giveup thesecurity blanketof a welfarestate for a competitivesystem in which they sink or swim on their own merits.

The lazinessthat is bred and nourishedby govern ment guaranteesof job security,minimumwages, subsidizedhousing,and other such "benefits"is a powerfulcounter to the sow-what-you-reapphi losophyof capitalism. Thecostsofsocialismare oftenhiddenfromthe man on the street,who doesn'tsee the lostoppot tunities,the lostdiscoveries,and the loststandard of livingthat might have been achievedunder a capitalistsystem.Socialismprovidesan illusionof somethingfor nothingwhilethe economicsystem feeds on itself.Withoutthe growthstimulatedby some degree of capitalism,socialismeventually collapses, as it is now collapsing in Eastern Europe. The scenarioof a democratic,but socialistand impoverishedEastern Europe also could have a EASTERN EUROPE: THE ECONOMIC STAKES ARE HIGH 187 major economic impact on the industrialized West. In this case, we might see massive amounts of for eign aid poured into Eastern Europe. In this sce nario, it wouldn't be Western companies investing in new production facilities, but rather Western governments pouring in tax money to prop up the new Eastern European governments. This would add enormous amounts of debt to the world's bal ance sheets. This money, like the loans to many other governments, would likely never be recov ered. The resulting defaults and write-offs, com bined with existing bad loans, could contribute to an economic calamity of global proportion.